Equity Residential (EQR) Q4 2013 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Equity Residential's Fourth Quarter 2013 Earnings Conference Call and Webcast. [Operator Instructions] I would like to remind everyone that this conference call is being recorded today, February 5, 2014. I will now turn the conference over to Mr. Marty McKenna. Please go ahead.

Thank you, Sarah. Good morning, and thank you for joining us to discuss Equity Residential's Fourth Quarter 2013 Results and Outlook for 2014. Our featured speakers today are David Neithercut, our President and CEO; David Santee, our Chief Operating Officer; and Mark Parrell, our Chief Financial Officer. Please be advised that certain matters discussed during this conference call may constitute forward-looking statements within the meaning of the federal securities law. These forward-looking statements are subject to certain economic risks and uncertainties. The company assumes no obligation to update or supplement these statements that become untrue because of subsequent events. And now, I'll turn it over to David Neithercut.

Thank you, Marty. Good morning, everyone. As shown in the results we released night, both the fourth quarter and full year 2013 ended up pretty much right on our original expectations. Same-store revenue growth for the full year came in at 4.5%. That was comprised of very strong revenue growth in the first quarter of 5.1%, which weakened, as we expected, during the year and ended with still strong but moderating revenue growth of 4% in the fourth quarter. Not surprisingly, San Francisco, Denver and Seattle continue to lead the way, with Washington, D.C. bringing up the rear. Also as we noted last summer, real estate tax increases would come in well above our original expectations, pushing same-store expense growth to the high end of our original guidance. And all that resulted in year-over-year growth in net operating income of 5.0%. So we're extremely pleased with the property performance delivered by our teams across the country because 2013 was no ordinary year in Equity Residential. Our teams produced these results, while at the same time seamlessly integrating $9 billion of new assets and handling nearly $4.5 billion of dispositions, all at the same time. So to everyone across the Equity platform, we send our thanks and congratulations for what was an absolutely incredible year. In last night's release, we also confirmed our 2014 guidance for same-store revenue growth of 3% to 4%. And note, again, that our same-store stat for the full year will include the nearly 18,500 units that we acquired in the Archstone transaction. Not surprisingly, our revenue growth estimates for next year are impacted significantly by having 18% of our revenue coming from the Washington, D.C. market, which we expect to produce slightly negative revenue growth this year. More importantly, however, we expect many of our markets to continue to deliver strong above-trend revenue growth in 2014. And lastly, I want to note that our 2014 guidance also calls for an increase in our normalized FFO of 8% at the midpoint of our range. This is very significant because after many years of elevated levels of transaction activity as we work to reposition our portfolio and assets located in high-density urban markets along the coast, a process that we believe was hugely NAV accretive for one that significantly diluted our normalized FFO growth each year. Beginning 2014, the earnings dilution from this activity will significantly reduce. And like the first 15 years of our life as a public company, we expect that once again post-recurring normalized FFO and dividend growth, in excess of our same-store NOI growth, reflecting the benefits of both modest levels of leverage and the benefits of our size, scale and our operating platform. Now I'm happy to turn the call over to David Santee, our Chief Operating Officer, who will take you through what we are seeing across our markets today and how we're thinking about revenue and expense growth in 2014.

Thank you, David. Good morning, everyone. Today, I'd like to provide color on our revenue and expense guidance for '14, give a brief overview across our core markets and let you know where we sit today. During Q4, turnover continued to decline and net of intra-property transfers, our full year 2013 turnover decreased 145 basis points to 50% from 51.45%. Our added focus on minimizing Q4 lease expirations continues to pay off, as our January move-outs showed a decline of 5% year-over-year. Move-outs to buy homes generally continues to be back-page news as 2013 move-outs for this reason were 13%, an increase of only 70 basis points, or 202 more move-outs across 80,000 plus units. Similar to 2013, we start the year from a solid foundation of pricing, occupancy and exposure across most of our markets. Today, occupancy sits at 95%, with a 7% exposure, identical to same week last year, with a net effect of new-lease pricing up 3.5% versus same week last year. Renewal flows issued for January and February combined are identical to January and February last year, albeit a different portfolio. And we would expect to achieve renewal increases in excess of 5.5% for this period. These early indicators, coupled with improved job growth and consumer confidence, lead us to believe that 2014 will be a solid year for Equity Residential. However, we are mindful of the potential impact from outside supply across most of our markets. Our 2014 revenue guidance of 3% to 4% is muted by one constant thing: All roads to revenue growth for EQR lead to Washington, D.C. At 18% of total revenue and our assumption of 1% decline for full year 2014, D.C. will shave approximately 80 to 100 basis points off of revenue growth for the entire same-store portfolio. With expense guidance of 2% to 3%, it's déjà vu all over again. Real estate taxes representing 34% of total expense are estimated to grow at 5.25%, which has improved from earlier estimates, as a result of California limiting the tax factor to 1% for 2014, a very rare event. The 2014 tax factor is the second lowest in 40 years, and, as a result, it's also only the seventh time in 40 years. Utilities, accounting for 15% of total expense, are expected to increase in excess of 7.5%, as a result of outside percentage increases in natural gas commodity prices, outside consumption of both gas and electric due to historically low temperatures, and an ever-increasing cost in both water and sewer, as many municipalities grapple with antiquated systems and limited revenue for modernization. Mitigating these sizable increases are our efforts to leverage the geographic locations of our new same-store portfolio. Through reengineering our leasing and advertising costs, on-site payroll and management company structure, delivering only expected synergies as we discussed prior to and during the integration of the Archstone assets. Our top-level assumptions that drive our revenue model and guidance for 2014 assumes average rent growth of 3.25%, achieve renewal rate of 4.75%, occupancy of 95.4% and turnover at 51.5%. Aside from D.C., we would expect the repeat of 2013 and maintain our same 3 buckets of revenue growth markets for 2014, which are San Francisco, Denver and Seattle buckets, which will produce combined revenue growth in excess of 5.5%. The second bucket contains L.A., Orange County, San Diego, Boston, New York and Florida, which will produce revenue growth from 3.5% to 5%. And in the last bucket, of course, is Washington, D.C., delivering a 1% decline. Now starting with Seattle, I'll give brief market highlights, some revenue expectations and expected deliveries that, combined, drive our thought process for rolled [ph] up revenue guidance. 2014 will see record deliveries in Seattle, with 8,600 units expected, amounting to a 46% increase over 2013. As a very manageable percentage of existing stock and knowing that Amazon will continue its large capital investment, following the split -- the union contract dispute successfully behind them and Microsoft has chosen to make the safe decision with its new CEO, we are optimistic that Seattle will be able to absorb this new inventory with mild disruption and remain in the top bucket of revenue growth similar to 2013. No surprise that San Francisco continues to lead the pack, as the cost to own far outpaces the cost of renting. With much of the first wave of North San Jose product leased-up, with virtually no impact to existing assets, the next wave is upon us. We would expect that any softness in the South Bay would be mitigated by increasing rents in Oakland and the East Bay, as the shortage of affordable housing pushes existing and prospective renters to lower-cost submarkets. Net affected base rent for this week are up 10.8% over same week last year, and renewal offers for February exceeded 12.5%. While they will see record deliveries of 5,500 new apartments in 2014, the rate of deliveries for '15 will decline 40%. We see nothing on the horizon that will impact the strong fundamentals that exist in San Francisco today. Now Los Angeles fundamentals appear to be in a continuing improvement pattern, with the anticipation of a breakout year for the L.A. economy and a new pro-business city government, the rebranding of downtown as a world-class city, coupled with meaningful additions to infrastructure and transportation, cause us to be very optimistic in L.A.'s ability to absorb the 11,000 new deliveries expected in '14. Also, given the centralized nature and small percentage of existing stock and a 30% -- 37% falloff in 2015 deliveries, we again see no major hurdles to improving fundamentals and revenue growth. Orange County and San Diego will continue to see above-average growth. With 5,000 new units expected to deliver in '14 for Orange County, we see little direct impact to the EQR portfolio, primarily due to the coastal nature of these new developments. San Diego will also see 5,000 new deliveries this year, but is also one of the few beneficiaries of the budget sequestration. With the military's reorientation to the Pacific Rim and sizable allocations of increased spending, we see economic stability near term; however, some potential price pressure in the high end of the market in downtown submarkets. Boston is currently delivering 5,500 units, with the majority of those units in the urban core, going head-to-head with many of our assets. We expect rents to moderate without serious disruption, given the net effect of rents these new buildings must command. Today, new deliveries were absorbed fairly quickly, especially during the fourth quarter. Given continued strong job growth and a 62% decrease in 2015 deliveries, we would expect any market disruption to be short-lived. New York, in our assessment, is simply taking a pause, with mild, elevated deliveries in both '13 and '14 at the high end of the market and increase move-outs to buy homes, which were up over 20%. New York has seen steady demand and moderating new lease net effective rent growth, as the job machine has produced more jobs on the low side of average income. Our outlook remains positive with renewals achieved still exceeding 4% for Q1. Washington, D.C., despite having 19,000 new deliveries in process as we speak, remain -- we remain very positive as the long-term owner. Near-term pricing pressure will net new average lease rents of negative 3% to 4% or greater, while achieved renewals that are already on the books for January, February and March exceed 2%, netting a 1% revenue decline for full year 2014. Detailed traffic statistics on our existing communities and new lease-ups in D.C. tell us that the private sector continues to hire, many prospective renters are coming from other states. And while the government is smaller today, they continue to fill positions and move forward. Without a material catalyst in place for significant increases in job growth, we would expect D.C. revenue growth to decline even further in 2015. And last, but not least, to South Florida. With its strong South American influence, the condo market in Miami is back and having a favorable influence on the economy. Modest levels of new deliveries will occur across the 3-county MSA with little, if any, disruption to the broader market. So in summary, we continue to see strong fundamentals across all of our markets. 2014 will see record levels of deliveries in the urban core; however, 2015 deliveries across our core markets will decline by 40%. We see nothing on the horizon that will negatively impact the continued improvement in the macroeconomic that drive our business and would expect solid performance through 2014 and beyond.

All right. Thank you, David. For the first time in many years, there's clearly very little to report on the transaction side for the quarter just ended. Because for the second consecutive quarter, we did not acquire any new assets. We did, however, sell a couple of assets in the fourth quarter, one in Atlanta and one in Tacoma, bringing the total sold for the entire year to just shy of $4.5 billion. And I'm very proud to say that this enormous level of disposition activity was accomplished right on our expectations with respect to price and cap rates, as we planned and budgeted for the Archstone acquisition. And is yet, another example of the incredible work by our teams across the country in successfully managing the execution risk of that extremely important transaction. The development team continues to be extremely busy with an elevated level of activity, thanks to our legacy land inventory and the Archstone land sites that we acquired early in 2013. During the fourth quarter of '13, we started 2 new projects totaling $382 million of total cost, bringing our starts for the entire year to nearly $900 million. The disclosure of our development business in last night's release shows about $1.7 billion of active development currently underway and nearly $500 million completed and in lease-up. I remind you that of this $2.2 billion total, 5 assets totaling $300 million, which came to us as part of the Archstone transaction, are not considered core investments and we would expect to sell these following lease-up and stabilization. During the quarter we did sell one land site in Miami, Florida, which was acquired as part of Archstone transaction. And we sold that for $22 million and, essentially, that was the basis that had been attributed to that. And we continue to hold 2 Archstone land sites that we expect to sell in the near term. So today, we hold 12 land sites in inventory that we expect to develop, representing a pipeline of just over 3,500 units in terrific urban core locations in our core markets, with the development cost of approximately $1.5 billion, and 60% of which is in the San Francisco Bay Area. We currently expect to start about half of this product this year and the other half in 2015, which will require an additional $1.1 billion or so of capital since the land has already been taken down for all of these deals. This incremental capital can be totally self-sourced with free cash flow, disposition proceeds or use of our $2.5 billion credit facility, while still maintaining conservative credit metrics. So we should average about $750 million of starts in each of the next 2 years. And by 2016, I would expect that our starts will average less than that level and be in the range of $500 million to $750 million a year. Now I'm happy to turn the call over to Mark Parrell.

Thank you, David. I want to take a few minutes this morning to give some detail on our guidance for 2014 and our capital and rehab plan, and I also want to discuss our projected capital [indiscernible] activities for the year. For the year, we have provided a normalized FFO guidance range of $3.03 to $3.13 per share. The 8% growth we expect in normalized FFO is being fueled by our expectation of continued solid operations, as well as the normalization of G&A and interest expense at much lower levels, which we think approximate our expected future run rate. As David Neithercut noted, another substantial contributing factor to our expected FFO growth in 2014 is the absence of transaction dilution from our investment activity. We are forecasting acquisitions and dispositions of just $500 million each at a narrower cap rate spread than in the past, reflective of the fact that the heavy lifting of our portfolio transformation is complete. Moving up to G&A. We have given annual G&A guidance of $50 million to $52 million, down from $62 million in 2013. We believe that our number in the low $50 million in G&A is a good approximation of a normal annual run rate for our company. The increased level in 2013 was driven primarily by Archstone-related and other one-time items. I also would like you to note that we have many G&A costs that are front-end loaded in the first couple of quarters, including compensation matters and certain reserves, and we expect 60% or so of our G&A spend to happen in the first 6 months of 2014. And then as a reminder, our 2014 same-store pool includes all of the Archstone stabilized assets that we own and operate, as if we own them for all of 2013. Because some 2013 and 2014 numbers, like property taxes, are impacted by the acquisition, some of the expense comparisons early in the year may require further explanation. We will keep you advised of those items, but we do not expect them to be material. Onto the dividend. As we previously announced, we have made a couple of adjustments to our dividend policy. With respect to timing, we now expect to make 4 equal dividend payments, starting with our April quarterly dividend. Also, we expect to continue our policy of paying a dividend equal to 65% of our normalized FFO guidance. But we will fix the total dividend amount at the midpoint of our initial guidance range, and do not expect to change our dividend during the year, even if our normalized FFO ends up being somewhat higher or somewhat lower than our initial normalized FFO guidance for the year. So applying all this to 2014, we have given a normalized FFO guidance range of $3.03 to $3.13 per share, with a $3.08 per share midpoint. Multiplying that $3.08 number by our 65% payout ratio leads to a projected annual dividend of $2 per share to be paid in quarterly installments of $0.50 each. As a reminder, all future dividend decisions are subject to the discretion of EQR's board. Now switching over to our capital spending. We have provided guidance on Page 24 for our capital expenditures, which we estimate will be $1,700 per same-store unit. That's a pretty significant increase over the about $1,200 per same-store unit that we spent in 2013. We expect rehabs, which I'll go over in more detail in just a moment, to ramp up and see them constituting $450 per same-store unit, while routine in unit replacements, like flooring and appliances, should be around $325 per unit. And that's really quite consistent with prior years. The major ramp-up in capital expenditure is in the building improvement category, and that includes things like roofs, mechanical systems and siding. That's what we expect to spend about $925 per unit in 2014, which is up about 50% from the $615 per same-store unit we spent in 2013. There's really 2 things going on that explain the increase. First, the 2014 same-store pool includes the Archstone assets, which include many assets with much higher rents, but also with higher building improvement costs. And second, you may recall that our initial 2013 capital expenditure guidance was $300 higher than the $615 per unit that we actually spent in 2013. Some large building improvement projects that we had hoped to complete in 2013, when we gave you guidance earlier in the year, ended up falling into 2014 and are impacting our 2014 numbers. On rehabs, we will continue to aggressively harvest value from our properties by doing those rehabs that meet our investment parameters. In 2013, we completed rehabs, and these are mostly kitchen and bath rehabs, on about 3,800 units, of which 2,560 were in same-store. The other 1,200 units rehabbed in 2013 were primarily Archstone assets. This effort will accelerate in 2014, and we expect to spend about $45 million, or about $8,500 per rehab unit, to rehab kitchens and baths and do other related work on about 5,300 units, all of which will be in same-store. This program is very scalable, and we will continue to show good investment discipline in terminating asset rehabs that failed to hit our return targets. And those targets are generally in the annual return on cost in the mid-teens. Finally, switching over to the capital market side. We are extremely well positioned headed into 2014. Our debt maturities in 2014 are modest, about $550 million, and are mostly back-end loaded. We have $400 million in hedges that lock in an approximate 10-year treasury rate of 2.5%, so we've mitigated most of the late risks in our refinancings. Our guidance assumes a midyear $500 million debt deal. We will also spend $600 million this year on the development activities that David Neithercut described. We will fund these development activities with net cash flow of about $250 million, and we will reborrow in 2014 some of the debt capacity created from the disposition activity we had in late 2013 that exceeded our $4 billion Archstone funding target. We expect to have about $53 million in capitalized interest in 2014. We also expect to maintain an average balance on a revolving line of credit of about $500 million this year, and end the year with about a $600 million balance. This will still leave us with $1.9 billion of capacity on the revolver that does not mature until 2018, and will help us maintain our target of having the company's floating rate debt exposure be between 15% and 20% of total debt. We like the very short end of the curve and think some modest exposure to it is appropriate. I'll now turn the call back to the operator for questions. Sarah? Operator?

[Operator Instructions] Your first question comes from the line of Dave Bragg of Green Street Advisors.

Question is on your expected trajectory of revenue growth throughout 2014. Do you expect a stabilization in the year-over-year growth later in this year? Or given your comments on D.C., should we expect continued deceleration throughout the year?

Well, if you look at our quarter or sequential numbers, it's really about the Northwest continuing to offset D.C. and then some help from L.A. and Orange County. So it really comes down to what happens in D.C., like I said, always relate to D.C. I am encouraged -- I mean, when we look at our rents today, our net effective rents were only down 2%. And there's been some strengthening in the last month or so, but you still have 19,000 units to come and another 10,000 next year. David Bragg - Zelman & Associates, LLC: And a follow-up to Mark's commentary on CapEx. What was the impact of revenue enhancing CapEx on NOI growth for '13? And what are your expectations for the impact in 2014?

Yes. Hi, Dave, this is Mark. Historically, it's been between 10 and 30 basis points beneficial to same-store growth. It was about 20 basis points beneficial to 2013. And we'd expect about the same in 2014. But the other point I just want to make to that is we really aren't doing it to juice any of the same-store numbers, we're really doing it because we think it's a good investment and we get a good IRR on it. and if we're not, we stop. And it's really as simple as that.

Your next question comes from the line of David Toti of Cantor Fitzgerald. David Toti - Cantor Fitzgerald & Co., Research Division: My first question is, going back to D.C., it seems that most of the market is pretty fearful of what's happening relative to revenue growth. Is this actually an opportunity in your mind or could it create opportunities going forward for acquisitions in that market, given relative weakness and probably some upward pressure on cap rates?

Well, I'd say we haven't seen any upward pressure in cap rates just yet. I will also say that the sample size have been pretty small to draw any conclusions about what we think happened to value there. And while, I guess, I would always consider us to want to be opportunistic, and all -- at 18% of NOI already, I think it would have to be extremely compelling for us to want to add to that. But we've been active in all of our markets and we'll sort of see what the opportunities are and make the appropriate decision at the time. David Toti - Cantor Fitzgerald & Co., Research Division: Okay, that's helpful. And my second question just has to do with condo conversion and condo mapping in the portfolio. Given your CBD concentrations, do you think there's some opportunities there for those assets into a relatively strong housing market?

I think that there's an awful lot of potential condo conversion potential in our portfolio. I don't see -- think you'll see us do what we have done sort of the last time through. But I think that there are -- you look at what's happening in New York City and what's happened to the increase in value of assets on a per unit, per-square-foot basis in New York, on the condo side versus the residential side or the rental side, the separation has been significant. So there certainly is, I think, some potential there. I'm not quite sure if it makes sense for us to try and sell into that. I don't think you'll see us do conversions ourselves. But you could see us explore from time to time the ability to maybe monetize something into a condo bit.

And we did repurpose some of our people during the downturn and had them get condo entitlements in California and Florida and other places just to have that optionality, really, for a buyer from us. David Toti - Cantor Fitzgerald & Co., Research Division: I guess, if you think about from a yield perspective, if you can sell to a -- if you don't want to do it yourself, but sell to a converter, sell for a 3 cap or 4 cap, and then redeploying to developments, even at a 5 and 6, I think that would be an attractive churn.

That would certainly be accretive, yes, it would. We will be open-minded about that.

Your next question comes from the line of Nick Joseph of Citigroup.

Full year guidance of $3.08, at the midpoint, assumes a substantial ramp throughout the year from first quarter guidance of $0.70. What's driving that ramp? And how do you expect it to track throughout the year?

Nick, it's Mark Parrell. Part of that is that comment I made about G&A, where we have a lot of front-loaded G&A, so just as you go through the quarters. And this is very similar to '13. If you look, the difference between the first and second quarter in '13 was about $0.07 a share. And that's really without getting too precise about what's going to happen this year. You just also have a very large ramp-up in NOI in the portfolio between the second and the first quarter. So interest expense pretty constant, G&A tapering off and NOI going up throughout the year. As the expenses taper off from the high energy costs of the first quarter going into the second. So really, it's not all that unusual for us to follow this pattern.

And then, you touched on it a little, but can you give some more detail on what's driving that G&A savings this year relative to last year?

Well, sure. It's a couple of different things. And the biggest is that there were compensation costs relating to Archstone that were running through our numbers in 2013 that won't exist. There also was a rebalancing of the company that occurred in terms of staffing. And so, there were employee termination costs that went through there as well. So all of that will not, we believe, repeat itself in 2014. And thus, we are going back to a more normalized G&A rate, which is really close to the number we had in 2012. So really, '13 ends up being a bit of an aberration.

Your next question comes from the line of Nick Yulico of UBS.

On the same-store revenue guidance, when you went through the market expectations, D.C. was similar to what you talked about in third quarter. But it sounded like the West Coast and the New York, Florida guidance was a bit better. Is that right, I mean, are you feeling a little bit better about those markets today versus the last guidance?

I guess, I would say we're unchanged on New York, but more positive on L.A.

Okay. So everything else is roughly the same?

Yes.

Okay. And then on the same-store expense guidance. Is there anything besides property taxes being a little bit easier this year that's driving the easier same-store expenses this year versus 2013?

Well, I think because we're adding the Archstone portfolio in the same-store, you do have quite a big pickup in Q1. As we -- as soon as we plugged them in, we discontinued a lot of the things that they did. Over the months, we've resized the portfolio. So payroll is helping. But also, the management company costs, we did some restructuring, no different than the G&A conversation that Mark just had that -- that's really offsetting a lot of these costs.

Okay. And then just lastly, I was hoping to get some numbers on -- in the rehab units that last year and this year, I think a fair amount of those are -- were in D.C. or going to be in D.C., some of the Archstone assets. Could you quantify a bit how much of the -- what percentage of your D.C. portfolio is sort of undertaking rehab last year and this year?

I'm sorry, as a percentage of the total portfolio or...

The percentage of your D.C. portfolio.

I'm not sure we have a percentage of D.C. portfolio. As much as we can tell you, about 20% of our dollars of that sort of $45-odd million will be spent in D.C. Between D.C., L.A. and San Francisco, that's about 70%. So the amount of contribution of the rehab properties has a lot to do with what market you're doing the rehabs in. I mean to move the average up from our midpoint you have to do those rehabs in markets that have growth that's higher than the average. So -- but we are not doing them, again, primarily to just move same-store numbers, we're doing them because they're good investments. So in D.C., I can't quantify, but I can tell you there's a lot of runway, and we expect to be doing 5,000 units a year across the whole...

Probably on a property count, it's about 10% to 15%. So 5 to 7 or 8 properties.

And then that's what is -- or that is what is going to be done this year? What's going to be the combined 2013, '14?

Well, I mean, we've got -- you just keep reloading, right? You have 7 or 8 you did and you're going to do another 7 or 8. And it's just going to keep kind of going through the system. I mean, this past year, we did -- it looks -- in D.C., there were 4 fairly large ones going on and several other smaller ones. And next year, I guess, another 7 or 8. And a few of these -- that will be at '13, will continue into '14 as well.

And your next question comes from the line of Alex Goldfarb of Sandler O'Neill. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Just want to continue on with the expense question. Again, you guys have been very good at managing expenses and almost, for us, it becomes -- we get sort of lulled into the sense of no matter what expense pressure you guys have, you seem to find offsetting savings so that net, it's 2% to 3% a year. As we think -- obviously, we're not -- you guys aren't providing '15 guidance. But is it reasonable to think that ongoing as a platform, with all the expense pressures that you guys have outlined, that 2% to 3% is sort of manageable over the next several years or should we think that maybe this year have some aberrational savings, at which point, years forward would be -- would see some higher expense growth?

I'll let David go just a minute. But I think that what you're seeing is the benefits of the size and scale being brought to bear. A lot of companies out there are looking to get scale. I mean, we've got it. And while there's not much you can do about real estate taxes, which is the lion's share, it's 30-some-odd percent, there's certainly ways that David and his team can continue to use our scale. And now, with the concentrations we've got in individual markets, I certainly have an expectation, and I can't -- so David will tell you what he thinks the 3-or-so percent of that. But I certainly see no reason why we shouldn't do better than others just because -- in any given year, because of the benefits of that scale that we have.

So not that I'm giving '15 guidance but I guess what I would say is go back to the big 3. Real estate taxes, payroll and utilities, make up about almost 70% of our total expense. This year, when you look at the makeup of the real estate tax, almost half of the 5.25% increase is in New York and about half of the half is the 421a. So that's known, it's planned. When you look at the utilities -- look, this is going to be a big year for utilities only because of the consumption, the rates on natural gas, electric. But then, when you look at payroll, I mean, I think we've been pretty disciplined in how we look at payroll. And we constantly try to reinvent how we run our portfolio. So I think there's no reason why next year shouldn't be any worse than this year. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Okay. And then the next question is for Mark. You commented on that you still have a hedge outstanding. Obviously, I'm sure bankers parade to your office every week, if not more often than that, pitching new ideas, especially in this interest rate environment. Is your view to continue to do more hedging given the prospect for higher rates, or your experience in the past is such that calling interest rate is difficult and, therefore, it's not worth bearing the cost when the hedge goes the wrong way?

Yes. We don't really try to call interest rates. We try to manage risk. I mean, interest rates changing is the same as utility consumption cost changing, it's just another material expense of running the company. So what we do, Alex, is we look at how much outstanding debt we have, what the rollover rate would need to be for us to accretively refinance it and then what the curve requires us to pay for this insurance going forward. And we've been very consistent over the last 10 or 15 years of kind of hedging about half of that risk under the theory that we don't know where rates are going. We're not taking a view, we're just buying some sort of insurance against rates getting away from us. So when rates end up lower, as they did the prior 3 years or so on us, we still got a good part of the benefit. And where, like this year, rates ended up getting away from everyone a little bit, we had insurance already in place and we'll get some benefits. So for us, it's just a risk mitigator over time, and there really isn't anything about guessing that we try to do that process. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Okay. So from, I guess, Sam's perspective, it doesn't matter that you had to pay a higher rate over the past few years because you locked in the hedging. The view is that if you look over the life of you guys hedging that net EQR's come out ahead, I guess that's the view?

Well, I'm not in the position to speak for Sam Zell. I would say that we're happy how everything turned out in general. And I would say that over a long period of time, I think our weighted average cost of capital was lower than, really, anyone else we compete against. And that's a very important strategic advantage to us. But again, I mean no one could guess as to the exact moment is a good day to do a debt deal. And I think it's a bit of a fool's errand to try to do that, so we don't even attempt it.

Alex, I think the way that we've managed the interest rate risk the most is by laddering the maturities out over a 10-year time period, so that in any one given year, we don't have a great deal of debt maturing. I think Mark and his team did an unbelievable job of managing that risk away as part of the Archstone transaction. And then, as he said, as we see debt issuances coming up in the future, we begin to sort of take some of that risk off the table with the -- within 9 months or so or a year of knowing that we'll likely to have to do some kind of issuance. But I think probably one of the most important ways we do it is just by making sure that we don't have any -- an awful lot of debt maturing in any one year.

Your next question comes from the line of Michael Salinsky of RBC Capital Markets.

First question, just relates to Archstone, obviously, a lot of synergies recognized in 2013. As you look at 2014 across the portfolio, it sounds like redevelopment's an opportunity. But where else do you see cost savings opportunities or integration opportunities relative to your existing portfolio?

So this is David Santee. I guess, what I would say is that all of the low hanging fruit was harvested pretty much the day we plugged the Archstone portfolio into our platform. So now, it's more sharpshooting and we've already kind of done a review of payroll and leveraging the fact that some of these properties are down the block, across the street, what have you. And there will be many, many opportunities, of small opportunities, but combined, they'll be material over the long run. But I think you're seeing kind of the full impact in the Q1 expense numbers.

Okay. And second question, David, as you look today where your cost of capital is, you look at the stocks trading, where do you see the best investment options today? Is it -- at this part of the cycle, does it still make sense to be doing core acquisitions or does it make more sense to be doing value-add acquisitions? And as you kind of look forward, how do you weigh in development on that?

Well, I guess that's a constant discussion here, Mike. I mean, on one hand, we will always be trading out of some assets and into other assets. We've given you guidance of the $500 million of buys and sells. That's just the budget that the guidance is based upon. If we can find good acquisition opportunities, the appropriate spread to move capital from one asset or one market to another, that's something that we will always do. And then, I think it really comes down to, as we think about free cash flow and that amount of capital that we can raise without having the 1031, right, we've got limited amounts of capital that we can raise in any given year without having it impact our taxable income, what do we do with that money? And we look at a development. To tell you, we've been open-minded, we'd consider stock buybacks, and we'll be thinking about what to do with that every step of the way. There's -- we had a board meeting here in December, as I mentioned to everyone on our last call, and we talked about uses of that capital and what the opportunities might be and what the stock price was and what we thought NAV was. And that's all part of the calculus. So we've got $1.5 billion of potential development that we could start. None of it's committed to be started. And we'll ask ourselves that question every time there comes an opportunity to start to go vertical on any of that, if it's the right thing to do, if there's not some other alternative use for that capital.

And then just finally, you put -- it's an ad disclosure there on the Lehman stock sales. Were you approached by Lehman in the fourth quarter or year-to-date about the sale of the stock or repurchase opportunities?

Mike, it's Mark. Like with many of our large shareholders, there's constant communication. We did not facilitate any of those transactions, Lehman did those on their own.

Your next question comes from the line of Jeffrey Pehl of Goldman Sachs.

I was just curious if you can give us an update on your development pipeline, what's the current yield you're expecting on that.

Well, of the projects that are under construction today?

Yes.

We've got a high -- so of about $1.7 billion underway today. We've -- on the current yields, we underwrote those at high 5s. We think that those deals could stabilize in the mid-6s. And that's on average across that entire portfolio of business.

Your next question comes from the line of Vincent Chao of Deutsche Bank.

Just sticking with the development yield side of things. As you think about the 750 million of starts this year and next, is it your expectation that rental growth can keep pace with any sort of upward pressure on construction, particularly on the construction and payroll cost? And where do you think we should expect yields to come in a little bit?

I think that right now what we're seeing for -- we think construction cost for 2014, I think, will be okay. I will tell you that 2013 probably saw across some of the markets a little bit more increase in construction costs than rental growth. But I think, as we sit here and we think about 2014, I think we'll be okay.

Okay. So yields can be maintained. All right. And then just a cleanup question. We talked a lot about the utilities and G&A impacting sort of the early part of the year. But just in relation to the minus $0.05 noted in the press release on OpEx and minus $0.02 of other, is that entirely related to the utility costs and G&A or is there anything else that's causing some downward pressure quarter-on-quarter?

It's Mark. You're also giving people pay raises and resetting your payroll run rate, resetting all your medical and workman's comp and other accruals. So all of that happens between the quarters, the first and the fourth, along with utilities, which is the biggest single thing.

Your next question comes from the line of Scott Frost of Bank of America.

I wanted to just make sure I understood the debt issuance here. The $0.5 billion you expect to issue midyear that's to refi the September maturities, and then an incremental $600 million on the revolver and that's how you get to your average debt balance you expected on the guidance. Is that -- that's correct, right?

That's correct. And you need to factor in the $250 million in net cash flow that we get through the year from the operating business.

Okay. And should we think of that $600 million to sort of -- from your comments, it seems that we should think about that as a permanent part of the capital structure, it's floating rate debt, that's what you want to have in your capital structure, that's correct, right?

Yes. I think for the indefinite future. We like the very short end of the curve, and I think a little exposure to it makes sense. And again, it's pretty modest, we have maybe 15% to 20% floating rate debt, and this will get us there. And I guess, if there's some great opportunity, we'll think on it. But right now, we think it's best to leave it there.

[Operator Instructions] Your next question comes from the line of David Harris of Imperial Capital.

Okay. Did you sell that German unit that you had in joint venture with Avalon that was left or was it a part of the Archstone transaction? Bloomberg was carrying the story that you might have been doing that before year-end.

Well, that's all in process.

All in process, so not yet done. Is there much left in joint venture from the Archstone transaction that's left aside from that German unit?

No, there isn't a great deal left, David. I mean, there's -- we may have $80 million, $90 million of JVs total, putting aside the Germany investment, which we do hope goes away soon.

Okay. And then this is a sort of a big picture question. Obviously, you've done tremendous work in repositioning the portfolio. You've got the assets where you want them now. Any thought other than perhaps a focus on redevelopment as to strategic growth initiatives that the company might have? I mean, the position of the portfolio is where you want it to be, the balance sheet is terrific, your dividend policy is completely transparent. Where do we go next?

Well, we've got a $30-some-odd billion portfolio that we could continue to work. And back to one of the original questions, there will always be opportunities to sell assets and reallocate that capital of what we think are better investment opportunities. So I think David and his team, David Santee and his team, will continue to work very hard to deliver the best performance they can from it. And Alan George and his team will continue to manage the portfolio and try and reallocate capital as best possible. And I think Mark Tennison and the development team will continue to find opportunities for us to redeploy our free cash flow. So we are now at a point where we're going to work very, very hard on what we've got, continue to improve it on the margin. But a lot of it is just blocking and tackling with the portfolio that we've got today.

And your next question comes from the line of Rich Anderson of BMO Capital Markets.

So just quickly, where are you on the rebranding of the Archstone assets and is there any kind of material costs embedded in 2014 for that?

Well, I mean, just rebranding is just renaming.

Yes, I mean, taking down the word Archstone.

Yes, I mean, basically, we have -- we are pulling the trigger, as we speak. I would tell you that most of the times, we're keeping the core part of the name, whether it's Archstone, Alban Towers or whatever. And there's not a significant cost in doing this. And we have -- we'll be working on it all year basically.

Okay. Enough for me. And then, just a bigger picture, Dave, for -- with Archstone now mostly in the rearview mirror, some opportunities for synergies on a go-forward basis. But you still, as Mr. Harris said, it's still a great balance sheet. Where do you put the probability in the next couple of years where EQR could, again, be a participant in some type of an M&A deal? I mean, is it like forget-about-it kind of mindset right now or maybe moderate or low probability? Where do you think you stand on that issue?

Well I guess I'd answer on that question by asking you what you think is out there that's terribly strategic for Equity Residential and will make us a better company after the fact?

I don't want to name names.

Well, I mean, I guess just maybe just think about it. I mean, we did not participate in the last event that occurred. And we just didn't see it as important or strategic in any way. So I think that there will be opportunities for us probably more on the private side than on the public side. I just don't look at the landscape and think that there's anything that's terribly strategic and important for us that would make us -- certainly, things could make us larger, but that's certainly not our goal. We want to be better, and I'm not sure there's anything out there that would make us better.

Mr. McKenna, there are no further questions at this time.

All right. Thank you, all, for your time today. We look forward to seeing many of you in Florida in early March. Thanks so very much.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.